At a time when the newly elected U.S. President, Donald Trump, is making a pitch to reshore manufacturing to America, its companies operating out of China are having second thoughts about what was considered a miracle economy. Speaking at the World Economic Forum in Davos in January, Trump made a simple pitch that if companies invested in American manufacturing capabilities, then they would be subject to the lowest taxation. While Trump has not made good on his campaign pledge—a 60% blanket tariff on Chinese merchandise—he has threatened imposition of a 10% levy from February 1 if Beijing does not act on the exports of ingredients for fentanyl, a harmful synthetic opioid. Among the first Presidential orders that he signed was a comprehensive review of trade with China, including supply chains that use other countries to evade exposure to tariffs.
A 100% Rise
Given these rising geopolitical tensions, a record number of American corporates—as many as 30%—are either contemplating shifting out some operations from China or are already in the process of relocating elsewhere, revealed the annual survey by the American Chamber of Commerce in China. This exodus of America Inc from China is twice as big as in 2020, when the Covid-19 pandemic had led China to impose strict lockdowns as a response to the contingency.
One of the factors for this mass departure is that the bottom line for any commercial venture is the profits it makes. More than 50% of the firms interviewed stated that they were barely managing to break even or bore huge losses in 2024. This has affected the ‘consumer’ and ‘services’ sectors, where the figures for companies that are in the red or just breaking even are 60% and 57%, respectively. The corresponding numbers for the ‘industrial’ and ‘technology and research’ segments are 48% and 45%. As many as 17% of respondents revealed that they had actively begun to shift out production and procurement outside of China—an increase of nearly 10 percentage points since 2020. Forty-four per cent cited Sino-American trade rows as a prime cause for this development. And, as many as 38% of the respondents saw developing nations in Asia, such as India, Vietnam, Thailand, Malaysia, and Indonesia, as preferred destinations for the relocation; 18% are keen to reshore to the U.S.
Foreign-owned firms are also increasingly feeling the heat as China queers the playing field. Nearly 50% of the companies interviewed in the technology sector grudge that local Chinese ventures are being given preference over them in the research and development and advanced technology sectors. In the same segment, as many as 93% of businesses stated that lack of market access had affected operations.
China No Longer A Top Investment Priority
The number of American companies that did not see China as a top priority in their investment plans has increased, reaching 21% in 2024. This is despite China pulling out all stops to improve the investment climate in recent times. It expanded market access and eased visas and investment restrictions last year in an effort to improve investor sentiment. However, a crackdown on business consultancies and audit firms has increased apprehensions among foreign businesspeople.
China is facing headwinds in other places too. As Germany heads to the polls in February, Friedrich Merz, who is considered a frontrunner for the country’s chancellorship, has cautioned its companies about the “risk” of investing in China, describing it as part of an “axis of autocracies” that did not adhere to “rule of law”.
Discontent In Europe Too
In a similar development last year, the European Union (EU) Chamber of Commerce in China in a paper revealed that there was a notion that foreign businesses operating in China were in for diminishing returns on their capital invested in the country, which did not justify the increasing risks of operating in the market. Investors had taken a view that challenges in the Chinese market appeared to be of a “permanent nature” that forced a “substantial strategic rethink” of their investment. Furthermore, as many as 44% of EU Chamber members perceived bleak prospects with respect to future profitability. The plummeting sentiment of EU members was ascribed to regulatory issues, preferences in government procurement, market access and overcapacity.
Amid this disillusionment with China, there could be an opportunity for India. Recently, tech giant IBM announced the winding up of its research operations in a series of retreats from China after nearly 25 years of operations. There are reports that the technology major plans to expand its Indian operations. Amid the exodus from China, India must position itself as a catchment.
(The writer is a China Fellow at Observer Research Foundation’s Strategic Studies Programme)
Disclaimer: These are the personal opinions of the author
